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What Really Happens When You Break Your Mortgage Early

July 16, 2020 | Share:

Homeowners

What Really Happens When You Break Your Mortgage Early – read on

If you find your mortgage’s existing terms and conditions no longer suit your financial situation, you may choose to renegotiate it for more favorable terms. The act of renegotiating requires you to break your current mortgage contract.

Breaking a mortgage early isn’t necessarily a bad thing. You may want to renegotiate your mortgage if interest rates have gone down, if your financial situation has changed for better or worse, or if you want to buy another property and have plans to move.

On the other end of the deal, there can be big costs to breaking a mortgage early. Seeking to qualify for a new mortgage, you will also have to pass a mortgage stress test. You will have to prove again that you can afford payments at a specific interest rate which is sometimes higher than the interest rate on your current mortgage contract.

When Am I Breaking My Mortgage?

When you sign your mortgage contract, you agree to several conditions. If you don’t adhere to those, you’re breaking your mortgage.

If you decide to stop, change, or renegotiate your payment schedule, you’re breaking your mortgage.

If you are switching to a new mortgage, you’re breaking your mortgage. Though mortgage contracts are agreed to without the intention of ever breaking them, sometimes it is in a homeowner’s best interest to break the contract. It is estimated that up to 40% of Toronto mortgage-holders will eventually refinance and often with penalties.

Will I Have to Pay A Fee to Break a Mortgage Early?

Before you decide to break your mortgage early, contact your lender to find out if fees are required. Usually, a prepayment penalty applies. Some lenders may agree to reduce your prepayment penalty as long as you arrange a new mortgage with the same lender.

A prepayment penalty isn’t the only fee you could pay when breaking a mortgage early. Administration fees, appraisal fees, reinvestment fees, and others exist. If you received cashback for a mortgage, that might also have to be repaid. Contact your lender to find out your circumstances.

How Much Will I Pay Breaking a Variable Rate Mortgage?

Canada’s National Housing Act is where to look to calculate how much you will pay when breaking a variable rate mortgage. It stipulates the penalty is equivalent to three months of interest.

Therefore, if you are paying a $400,000 variable rate mortgage at 3.8 percent. If your monthly payment’s $2,060 and the interest part of this is $1,254, multiply this by three. Your variable rate mortgage penalty, in this case, will be $3,762.

How Much Will I Pay Breaking a Fixed Rate Mortgage?

When a holder breaks a fixed-rate mortgage, the penalty is significantly higher. The exact number’s difficult to calculate. It is often based on the interest rate differential, comparing the interest rate of your current mortgage against what you would receive today.

For example, you have a $400,000 fixed-rate mortgage on a five-year term. Let’s say there’s a 5.9% interest rate on it. This equates to a best-guess of $24,000 as a holder’s penalty for breaking a fixed-rate mortgage.

What If I Break My Mortgage Contact to Go With a New Lender?

If you are interested in going to a new lender, you’re very likely going to be hit with several payment penalties. For some homeowners, they find they save money by not breaking their mortgage contact due to the high cost of penalties and fees.

Do I Really Have to Submit to a Mortgage Stress Test?

When you break a mortgage early, it’s a two-step process. The first is breaking your current mortgage. The second is negotiating a new mortgage. For the second part, you have to go through the same process you would if you were applying for your first mortgage. Canada’s mortgage stress test is a part of that.

You will have to undergo a mortgage stress test, a new credit check, and go through the application process. There may also be a title search, appraisal and inspection fees, and additional costs.

If you are considering breaking your mortgage, speak to your lender and examine your contract. You may be able to negotiate lower penalties on breaking your contract and/or assistance in negotiating a new mortgage.


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